The global economy is still navigating difficult times, with many fearing that recession and currency depreciation events will continue, and perhaps even exacerbate, over the following years. The pandemic and the enduring impact of global conflicts have changed things permanently, as recovering from them remains an ongoing process. Surging debt, emerging trends such as decarbonization, digitalization, and deglobalization are all occurring simultaneously, making the situation even more challenging. Both local markets and the global economy struggle as a result, and things are far from being static from now on.
Being aware of how markets change is crucial for your own financial well-being, especially if you have an investment portfolio you want to grow. As the pace of the changes and shifts continues to accelerate, here are a few of the trends that are likely to cause the biggest shifts and how you can prepare for them.
Decentralization
The blockchain, a decentralized network that enables investors to undertake financial transactions, has been largely associated with the cryptocurrency world so far. Those assessing the latest ETH price prediction figures, analyzing volumes and engagement rates to figure out what the best move for their portfolios would be, are familiar with the ways in which the blockchain operates, but most members of the general public only have a vague idea of what the ledger entails in the first place. Although the association with crypto is very strong, researchers believe that the technology could be used for several other purposes, most notably in logistics and supply chains.
But the blockchain could help with issues arising in traditional finance systems as well. The expenses and potential lack of transparency. Fraud and cybercrime are some of the troubles the systems face, all of which could be solved or at least improved with the help of the blockchain.
Sanctions
Military conflicts, tense geopolitical situations, and changes in global trade relations are all influencing policies and sanctions. Although things can change so suddenly, financial institutions have no choice but to keep up with the frameworks and align themselves with regional, national, and international sanctions regimes. At the same time, they must also find ways to navigate regulatory actions from an ever-growing number of authorities, all of whom are aiming to remain compliant as well.
New areas are explored as a result of these sanctions as well, with the United Kingdom recently announcing the introduction of a new category of standalone sanctions that will be exclusively dedicated to targeting organized immigration crime. The system is the first of its kind in the world. Additional pressure comes from having to apply export control regimes that are increasingly complex. The enforcement of unilateral sanctions will bring challenges for marketplaces such as Singapore, Dubai, and Hong Kong.
Mid-Sized Businesses
When it comes to news from the corporate world, things are often focused on the largest corporations dominating entire market niches, or the resilient small businesses with inspirational stories, with very little discussion about those falling in the middle. Mid-sized businesses have gained much more access to funding recently, going on to support increasing economic activity and higher employment levels. Private credit funds are often used because companies might be too large for regular banks to lend to, but also too small to issue bonds.
Private equity firms manage these funds, getting financing from banks and other financial institutions in return. The most common members of the latter category include sovereign wealth funds, insurers, pension funds, and endowments. Since they tend to be much more stable over the long term compared to banks, they don’t need to move back as quickly during times of financial stress.
Asset-Backed Finance
The concept of Asset-Backed Finance (often referred to as ABF) refers to the use of contractual cash flows from highly diverse asset pools, including consumer loans, mortgages, and auto leases, as a means of securing financing in the form of private credit investments. The global private ABF market is around $5.2 trillion, approximately 15% larger than five years ago, and almost 70% larger than its peak of almost two decades ago, when it was $3.1 trillion. Growth projections indicate that in the next five years the sector will amount to at least $7.7 trillion.
Asset-backed finances have the potential to act as a powerful tool that meets institutional demand for private credit solutions. Compared to direct lending, ABF is secured by pools of underlying assets, as well as diversified across up to several thousand loans, making the risk much lower compared to that of debt, which is tied to specific borrowers.
Private credit
Private credit is highly attractive for institutional investors of all kinds, with banks citing it as one of the best and strongest growth opportunities out there. The market’s size is roughly around $1.5 trillion, considerably higher than it was in 2020, when it stood at $1 trillion. By 2028, predictions show that it will most certainly approach $3 trillion. Investment-grade private credit is particularly sought after, providing a yield premium over the similarly rated public bonds due to the lower liquidity and the fact that it is privately negotiated.
In the case of the investors, this will mean higher returns for similar credit risk and include different lender protections and customized terms. When it comes to the borrowers, financing guarantees better customization and enhanced flexibility, especially when it comes to repayment schedules, as well as structuring around refinancing and acquisitions.
The Five Ds
Just as sustainability is focused on the Rs of reduce, reuse, repair, and recycle, the financial world will likely be focused on the Five Ds in the near future. Deglobalization is the first and most noteworthy, accelerated by rivalries, tensions, supply chain vulnerabilities, and the resurgence of nationalism and regionalization. As a result, inflation will likely increase and growth will be challenged, with emerging economies being disproportionately impacted.
Decarbonization will continue as a result of climate change, but adaptation will require robust fiscal support. Shifts in demographics, namely greater longevity and decreased birth rates, will lead to declines in workforces, while debt, the fourth member of the group, will continue to increase and boost government obligations, which are already at record levels. Lastly, digitalization and the continuous growth of tech developments will continue to change the world, but might need regulations as well (such as in the case of AI, which can be used to create and disseminate misinformation).
To sum up, global finance landscapes are bound to change and will do so under the influence of several different trends.
